DCAA Issues New Audit Guidance

• Dependent Health Benefit Costs

Current audits have disclosed that contractors paid a significant number of dependent medical costs claims for family members who did not qualify as dependents under their medical/health care plans. The guidance cites examples of dependent/spousal ineligibility: (1) dependents reach the age where they no longer qualify as a dependent (2) spouses were divorced or deceased or (3) dependents were covered under another plan as well as the current one where the employee failed to notify the contractor of the double coverage where the contractor’s plan would require an adjusted premium for the double coverage. The guidance states the overpayments may be a result of inadequate procedures in place to ensure the unallowable costs are not made in which case the failure to have adequate internal controls should be reported as an internal control deficiency and a CAS 405 noncompliance if the contractor’s contracts are fully or modified CAS covered.

The guidance states the unallowable health insurance premiums are covered by FAR 31.205-6(m)(1) where the relevant section states “the costs of fringe benefits are allowable to the extent they are reasonable and are required by law, employer-employee agreement or an established policy of the contractor.” So since the unallowable costs “do not meet the expressed requirements of the referenced FAR provision (i.e. in accordance with established contractor policy)” penalties are recommended on any such expressly unallowable costs. (Editor’s Note. Commentators have pointed out – correctly in our opinion – that penalties are inappropriate here because DCAA has taken an improper expansive view in considering these costs to be “expressly unallowable” which is the condition for imposing penalties. The quoted FAR section does not meet the definition of expressly unallowable found at FAR 31.001 nor court decisions that have defined such costs as “unmistakable” and “beyond cavil.”) (09-PSP-016R)

• Ensure New Ethics FAR Changes are Incorporated into Accounting System Control Audits

DCAA has revised its audit guidance for reviewing contractors’ control environment during Control Environment and Overall Accounting System Control audits to respond to recent FAR changes related to Ethics and Conduct requirements. The expanded steps in the 24 page audit program is to incorporate recent FAR changes that now require contractors to have (1) a written code of business ethics and conduct (2) a business ethics and compliance training program and (3) an internal control system that facilitates timely discovery and disclosure of improper conduct and ensured corrective measures are promptly instituted and carried out. The guidance includes a summary of the FAR changes as well as a presentation of the audit program with extensive additions clearly noted. Though the guidance does not specify what sized contractors it applies to it does mention that additional guidelines applying to non-major contractors will be issued by Sep 15, which has not yet been issued as late October (09PAS-14(R).

• New ESOP Rules

The new guidance reflects recent changes to CAS 415, Deferred Compensation that provides costs of Employee Stock Ownership Plans shall be accounted for in accordance with revised CAS 415. The guidance reviews the measurement, allocation and allowability of ESOP costs.

Measurement of ESOP costs. ESOP costs will be measured by the contractor’s contributions, including cash, stock, interest and dividends to the ESOP. There are two types of ESOPs (1) non-leveraged where the contractor makes cash contributions to an Employee Stock Ownership Trust (ESOT) which, in turn, purchases company stock with the cash and distributes the stock to employees’ accounts or (2) leveraged where the ESOT borrows money from a bank and uses these funds to purchase stock where the contractor’s contribution is measured by the total amount of principal and interest on the ESOT loan. The contractors’ contributions made in company stock is to be measured at the time it is made where, for example, if a contractor contributes a block of stock in 2009 to be awarded to participating employees over 10 years the annual contribution will be measured by the market value of the stock in 2009 times the number of shares awarded each year.

Assignment of ESOP costs. The basis requirement of CAS 415 for assigning deferred compensation which includes ESOPs has not changed so the cost of ESOPs are assigned to the cost accounting period the contractor incurs the obligation to compensate the employee. This assignment of ESOP costs to an accounting period will occur only if the contribution, whether it be cash or stock or any combination, is awarded to employees and allocated to their accounts by the Federal tax deadline, including permissible extensions. So, for example, if the award to employees are made in 2008 but the contributions are not made until April 10, 2009, the costs are recognized in 2008.

Allowability of ESOP costs. Whereas CAS 415 will exclusively govern measurement and assignment of ESOP costs whether or not contracts are CAS covered, reasonableness and allowabililty are to be determined in accordance with FAR 31.205-6(a). So, for example, section 6(i)(2) provides that compensation represented by dividend payment or calculated based on dividend payments are unallowable and hence any dividend payments included in ESOP contributions are to be questioned. The guidance states that section 6(q) has not yet been updated to reflect the CAS 415 revisions so discussions about ESOPs meeting pension plan definitions should be ignored (09-0PAC-013(R).

• Audit Alert to DoDIG Fraud Handbook

(Editor’s Note. We are seeing a definite increase in referrals of contractors to various investigative agencies for possible fraud activities – our consulting business working with contractors and their attorneys in such investigations has substantially increased – so it’s a good idea to see what one major source of such referrals consider to be indicators of potential fraudulent actions.)

Auditors are reminded that part of their risk assessments for their audits is to assess the risk of fraud. This includes reviewing the fraud risk indicators specific to the audits and documenting any risks identified. Auditors are told the principle source for the applicable risk indicators are to be found at the DOD Office of Inspector General’s (DoDIG) Handbook on Fraud Indicators for Contract Auditors where the new address is at http://www/dodig.mil/PUBS/igdh7600.pdf (Note we wrote an article about fraud indicators in 2008 in the REPORT.)(09PAS-012(R)).

{TAG_FORM_TITLE}